PROFESSIONAL ETHICS

FUNDAMENTAL PRINCIPLES OF PROFESSIONAL ETHICS

SELF INTETERST THREAT
 SELF INTEREST THREAT
Self-interest threats Self-interest threats include the following:
๏ Financial: For example if an auditor own shares in the client, the auditor could be accused of wanting the client’s
profits to look good, so that the share price and/or dividends increase thereby enriching the auditor.
๏ Close business relationships are also threats. For example, if a partner retired from an audit partnership and then
immediately went to work for a client, they could be accused of having lined themselves up for a job and to do that
they perhaps did not do their audit rigorously. A period of at least two years should pass before an ex-partner takes
up an appointment with a client. Having a partner on the client board is also unacceptable.
๏ Close family and personal relationships between the auditor and owners or directors of the company they are
auditing lay the auditor open to suggestions that the audit has been neither objective nor independent, and that the
auditor did not show the proper degree of integrity.
๏ Loans and guarantees from the client to the auditor should be looked at carefully. If the audit client is a bank and
it makes a loan on a normal business terms to a member of the audit staff, for example a mortgage, this would
normally be regarded as acceptable. If however the bank (the audit client) made a large loan to the firm that was
not on normal lending terms, this would compromise the auditor's independence (ie that favourable terms are for a
'clean' audit opinion). Certainly no loans or financial relationships should exist between a client and an auditor if it
is not normal business for the client to make loans.
• Overdue fees put the auditor at some risk as there is a possibility that client will never pay those fees.
This could lead to accusations that the auditor has not modified the audit opinion to reduce the
likelihood that a worried creditor triggers the company’s liquidation. If there are overdue fees the
auditor should not make the situation worse and should not incur any more chargeable time until
those fees have been settled. If fees remain outstanding, the auditor should resign.
๏ Contingent fees fee arrangements are not permitted for audit engagements. An example of a
contingent fee is one that is calculated based on reported revenue or profit.
๏ High percentage fees. If the auditor earns a high percentage of total income from one audit client,
then the auditor will rely too much on that client and can’t afford to lose them. This can give the client
too much leverage over the auditor. The total fees from a public interest entity ('PIE') client, (eg a
company listed on a stock exchange) should not exceed 15% of the firm's total fees for two
consecutive years. If they do, safeguards must be applied or the engagement ended (see s.4). No figure
is mentioned for non-PIE clients, but auditors need to be mindful of this threat.
๏ Low-balling refers to the practice of quoting a very low audit fee to win a client, in the hope of
gaining more lucrative non-audit work. This means really that the audit does not pay for itself so how,
therefore, could a proper audit be done? Winning an audit is a competitive business and the audit fee is
an important factor to clients. There is nothing illegal about low-balling and quoting a lower fee is not,
in itself, unethical. However, an auditor could find it difficult to claim that a proper audit has been
carried out if a loss were made on the audit.
๏ Recruiting staff on behalf of a client should not be undertaken. The danger here is that if members of
staff are recruited by the auditor, particularly financial staff, then subsequently the auditor might be
reluctant to criticize the performance of those staff members as the advice they gave on recruitment
looks bad. However, providing recruiting services to a non-PIE client is not prohibited as long as the
hiring decision is left to the client. Similar considerations should be taken into account when asked to
perform any management function for the client.
 SELF- REVIEW THREAT
• Self review threats arise when an auditor does work for a client and that work may then be
subject to self-checking during the subsequent audit. For example, if the auditor prepares the
financial statements, and then has to audit them, or the auditor performs internal audit
services and then has to check that the system of internal control is operating properly.
Auditors could obviously be reluctant to criticize the work which their own firms have
earlier undertaken, and this could interfere with independence and objectivity. Generally
auditors must be very careful when undertaking such work. Certainly it is common for
auditors to do additional work for their clients, but what is important that the work is done
by an entirely different team from the audit firm. Self-review threats can also arise if a
member of the audit team: ๏ Recently served as a director/officer of the client ๏ Is seconded
('lent') to the client for a temporary assignment.
 ADVOCACY THREAT
• Advocacy is where the assurance or audit firm promotes a point of view or opinion to the
extent the subsequent objectivity is compromised. An example would be where the audit
firm promotes the shares in a listed company or supports the company in some sort of
dispute (eg with the tax authorities). Advocacy can interfere with professional skepticism. As
always, the audit firm should weigh up the risks to its objectivity, integrity and independence
and should withdraw from performing further work if those risks are too high.
 FAMILIARITY THREAT
• Familiarity threats arise because of the close relationship between members of the audit team
and the client. The close relationship can arise by friendship, family or through business
connections. There is no general definition of what’s meant by close relationships, but if you
were an auditor and your brother was the Finance Director of a client firm then there
probably is a close relationship! If however the finance director was a remote cousin of
yours, there might not be a close relationship. Note that there does not have to be any family
or legal relationship: friendship can threaten independence and integrity. Long association of
senior personal creates a familiarity (and self-interest) threat. The Code requires that a key
auditor partner cannot serve a PIE client for more than seven years. This is to prevent too
close a relationship and friendship growing between the two parties. The problem is that
when a close relationship does grow, objectivity and skepticism are liable to be lost.
 INTIMIDATION THREAT
• The final groups of threats are intimidation threats. These can deter the assurance team from
acting properly. Examples could be threatened litigation, blackmail, or there might even be
physical intimidation, though it is to be hoped that that is rare. Blackmail could be more
subtly applied . For example, if a gift or hospitality from a client were to be accepted, the
possibility of that being made public would create an intimidation threat to objectivity.
 SAFEGUARDS

• Safeguards Applying safeguards may be a suitable response to address an identified threat. Other responses are to
eliminate the source of the threat or decline/end the activity.
• The ACCA Code of Ethics (2019) defines safeguards as "actions, individually or in combination, taken by the
professional accountant that effectively eliminate threats to compliance with the fundamental principles or reduce
them to an acceptable level".
• A professional accountant’s action is not a safeguard unless it is effective.
• The ‘test’ of what is acceptable is whether a “reasonable and well informed party … would be likely to conclude
that … compliance with the fundamental principles is not compromised”.
• Safeguards vary depending on the facts and circumstances. Examples of actions that might be safeguards to address
threats include:
• ๏ Assigning additional time and qualified personnel (e.g. for a self-interest threat).
• ๏ Having an appropriate reviewer (not a member of the team) review the work performed (for a self-review threat).
• ๏ Using different partners/engagement teams with separate reporting lines for the provision of non-assurance
services to an audit client (for self-review, advocacy or familiarity threats).
• ๏ Involving another firm to (re-)perform part of the engagement (for most threats). ๏ Disclosing to clients any
referral fees/commission arrangements for recommending services/ products (for a self-interest threat). ๏ Separating
teams when dealing with matters of a confidential nature (for a self-interest threat ).
๏ Using different partners/engagement teams with separate reporting lines for the provision of
non-assurance services to an audit client (for self-review, advocacy or familiarity threats).
๏ Involving another firm to (re-)perform part of the engagement (for most threats). ๏
Disclosing to clients any referral fees/commission arrangements for recommending services/
products (for a self-interest threat). ๏ Separating teams when dealing with matters of a
confidential nature (for a self-interest threat).
PRACTICE QUESTIONS